Italy 10-year bond yields rise by nearly 8 bps
The initial reaction to the ruling was met by a bit of a whipsaw but we are starting to see a more profound selloff in European assets now after some time to digest.
Italian bonds are falling sharply, resulting in a jump of nearly 8 bps in 10-year yields.
And the movement in the bond market is spilling over to stocks as we are seeing European indices fall to session lows and paring gains on the day. The DAX is now up by just 0.7% after having seen gains of over 2% at the start of the session earlier.
In turn, this is having spillover effects to currencies as we see the dollar and yen push higher across the board. AUD/USD have lost its earlier momentum to fall to a low of 0.6418 while EUR/USD has fallen from 1.0900 to 1.0855 currently.
As mentioned earlier, this is the key passage to take note of (bolding the main point):
"Following a transitional period of no more than three months allowing for the necessary coordination with the Eurosystem, the Bundesbank may thus no longer participate in the implementation and execution of the ECB decisions at issue, unless the ECB Governing Council adopts a new decision that demonstrates in a comprehensible and substantiated manner that the monetary policy objectives pursued by the PSPP are not disproportionate to the economic and fiscal policy effects resulting from the programme. On the same condition, the Bundesbank must ensure that the bonds already purchased and held in its portfolio are sold based on a - possibly long-term - strategy coordinated with the Eurosystem."
While that may sound worrying, I highly doubt we will reach such a point for that to happen.
In any case, the ruling holds zero bearings for PEPP so that is a point to consider as a support for Italian bonds. Though again, it brings us back to the point that we still are awaiting from the ECB on the size of PEPP as it will run its course by October at its current pace.
